Prudential Regulation

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The Acting Comptroller of the OCC discussed the limits of large bank manageability and the steps that regulators can take to address the risks posed by size and complexity.

Arthur S. Long, Pia Naib, and Deric Behar

On January 17, 2023, Acting Comptroller of the US Office of the Comptroller of the Currency (OCC) Michael Hsu delivered a speech titled “Detecting, Preventing, and Addressing Too Big to Manage.” The OCC charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of non-US banks. The speech is the latest statement by the leader of the OCC on US bank size in the wake of substantial mergers in the banking sector, which have become a political as well as supervisory issue.

The guiding principles are similar to related proposals from other banking regulators, but will require further clarification through the comment process.

By Nicola Higgs, Betty M. Huber, Arthur S. Long, Pia Naib, Anne Mainwaring, and Deric Behar

On December 2, 2022, the Board of Governors of the Federal Reserve System (Federal Reserve) published proposed Principles for Climate-Related Financial Risk Management for Large Financial Institutions (the Proposal). The Proposal urges large financial institutions[1] to consider how best to identify, measure, monitor, and control the various risks associated with climate change over a variety of time horizons. It also specifies that large financial institutions should monitor microprudential risks, including credit, market, liquidity, operational, and legal and compliance risks, as well as other financial and nonfinancial risks that could arise from climate change.

The Proposal aims to support financial institution boards of directors and management in incorporating mitigation of climate-related financial risks into their broader risk management frameworks, consistent with safe and sound practices and the Federal Reserve’s rules and guidance on sound governance.

Large financial institutions are defined as those with over $100 billion in assets that are subject to Federal Reserve supervision, including the US operations of non-US banking organizations. The Federal Reserve’s guidance is founded on the premise that climate change poses an emerging risk to the safety and soundness of financial institutions and the financial stability of the United States.

This annual publication outlines some of the primary focus areas in 2022 for UK-regulated financial services firms. There has been a marked shift away from dealing with immediate post-Brexit priorities to more fundamental consideration of the direction of travel of UK financial services regulation, and this is borne out across many of the topics covered in this year’s publication.

While monitoring regulatory divergence between the UK and the EU will be a key theme for 2022, other familiar topics will…

A wide-ranging report encourages regulators to take a concerted approach to combat climate-related risks to the US financial system.

By Jean-Philippe Brisson, Paul A. Davies, Nicola Higgs, Malorie R. Medellin, and Deric Behar

On October 21, 2021, the Financial Stability Oversight Council (FSOC) published a lengthy report on Climate-Related Financial Risk (the Report), marking the first time that FSOC has officially identified climate change as an emerging and increasing threat to US financial stability. FSOC issued the Report pursuant to a directive in President Biden’s May 2021 Executive Order on Climate-Related Financial Risk, which tasked FSOC to assess and collaboratively address climate-related impacts on US financial system stability.

The Report is another building block in the Biden Administration’s “whole of government” approach to combating climate change and the climate-related risks that threaten the US economy. The Report comes just days after the Administration issued “A Roadmap to Build a Climate-Resilient Economy” (the Roadmap), which heralded the Report as “the first step in a robust process of US financial regulators developing the capacity and analytical tools to mitigate climate-related financial risks.” (See this Latham post for more information.)

The EBA consultation paper calls for the implementation of a Green Asset Ratio to measure banks’ sustainability performance.

Regulators and sustainability-conscious investors increasingly expect banking institutions in the European Union to focus on environmental, social, and governance (ESG) issues and provide quantitative and qualitative disclosures relating to such issues, including climate change risks and the environmental objectives of climate change mitigation and adaptation, from as early as 2022.

These prudential disclosure requirements arise under Article 449a of the Capital Requirements…

Latest FCA consultation focuses on remuneration, risk management and governance, and liquidity requirements.

By Rob Moulton and Charlotte Collins

On 19 April 2021, the FCA published its second Consultation Paper (CP21/7) on the new UK investment firms prudential regime (IFPR). The IFPR will create a new prudential regime for FCA-authorised MiFID investment firms, and will reflect (but not mirror exactly) the EU IFD/R regime. For an overview of the proposed UK regime, please see this Client Alert.…

ESMA and the EBA advise on KPIs for transparency on institutions’ environmentally sustainable activities, and the EBA consults on prudential disclosures of ESG risks under the CRR.

By Nicola Higgs, Suzana Sava-Montanari, and Axel Schiemann

On 26 February 2021, both the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) issued guidance on Article 8 of the EU Taxonomy Regulation. Firms in scope of the EU Taxonomy Regulation now have all the relevant guidance to start planning their disclosures on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable under the EU Taxonomy Regulation.

The guidance elaborates on the Key Performance Indicators (KPIs) that institutions should disclose, the scope and methodology for the calculation of those KPIs, and the qualitative information that institutions should provide.

The main KPI proposed is the Green Asset Ratio (GAR), which identifies institutions’ asset financing activities that are environmentally sustainable according to the EU Taxonomy Regulation, including activities consistent with the goals of the European Green Deal and the Paris Agreement. Information on the GAR is supplemented by other KPIs that provide information on the taxonomy-alignment of institutions’ services other than lending and investing. The EBA has integrated proportionality measures that should facilitate institutions’ disclosures, including transitional periods where disclosures in terms of estimates and proxies are allowed.

Regulators consult on an investor identification regime and outsourcing requirements, and issue guidance on electronic storage of regulatory records and environmental risk management

By Farhana Sharmeen, Simon Hawkins, Kenneth Y.F. Hui, and Marc Jia Renn Tan

This blog post summarises key regulatory developments in Hong Kong and Singapore during December 2020, including:

  • The SFC’s consultation on an investor identification regime for the securities market
  • The SFC’s additional guidance on external electronic data storage
  • The MAS’ response to feedback on the proposed guidelines on environmental risk management
  • The MAS’ consultation on requirements in relation to the management of outsourced services

Regulators propose new regulations for virtual asset exchanges and enhanced customer identity verification requirements, and launch an innovative commercial data interchange.

By Farhana Sharmeen, Simon Hawkins, Kenneth Y.F. Hui, and Marc Jia Renn Tan

This blog post summarises key regulatory developments in Hong Kong and Singapore during November 2020, including:

— The Hong Kong FSTB’s consultation proposing a new regulatory framework for virtual asset exchanges
— The HKMA’s new commercial data interchange initiative
— The MAS’ consultation proposing requirements to strengthen financial institutions’ non-face-to-face identity verification process of individuals
— The MAS’ guidance to financial institutions to review security controls amidst COVID-19
— The MAS’ publication of its 2019/2020 enforcement report

The US prudential regulator is paying attention to climate risks, and will likely act to mitigate those risks if they threaten financial stability.

By Alan W. Avery, Pia Naib, Deric Behar, and Kristina S. Wyatt

In its November 2020 Financial Stability Report (the Report), the Board of Governors of the Federal Reserve System (Federal Reserve) acknowledged, for the first time in the Report’s history, the impact of climate risks on financial stability. The Report, which aims to provide a current assessment of the resilience of the US financial system on a biannual basis, reflects Chairman Jerome Powell’s November 5, 2020, statement, in which he said that the Federal Reserve is “actively … getting up to speed” on climate risks and impacts to the financial system.